Health-insurer mergers’ murky effects;

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Insurers’ consolidation not clearly linked to cost woes

MarketWatch/Dow Jones

SAN FRANCISCO, CA — Mergers of health-insurance companies, which have proliferated in recent years, were supposed to provide an antidote to the high cost of medical care — or at least a salve.

But it doesn’t appear to be working out that way, some analysts say, although there is so much local variation in the effect of the mergers that a definitive answer is hard to come by. Factors such as how doctors and hospitals are organized, how employers choose coverage packages and even how populated an area is make comparisons difficult.

A new study from the American Medical Association found in 56% of local markets, or 166 of 294 metropolitan areas, a single insurer controlled more than half the business in health maintenance organization (HMO) and preferred provider networks (PPO.) The study maintains some areas are seeing virtual monopolies and are cause for concern.

The nation’s largest insurer, WellPoint, has about 34 million Americans in its plans after merging with Anthem and buying WellChoice in the past two years, the AMA study said. UnitedHealthcare has been on an acquisition spree as well and now covers 27 million. Together the two companies control 33% of the private health-insurance market.

But whether such market-share gains translate into worse conditions for consumers — higher prices and/or skimpier benefits — is unclear, said Paul Ginsburg, president of the Center for Studying Health System Change, a nonprofit, nonpartisan research outfit in Washington.

“We know health insurers are becoming more profitable, but some of that is at the expense of providers,” Ginsburg said. “We don’t know if it’s at the expense of consumers or not.”

Worrisome trends

Still, it’s hard to look at the indicators and conclude that concentration hasn’t played some role in higher costs.

Health insurance premiums have been on a tear in the past five years, and only last year did the growth slow to under double digits. Premiums rose 9.2% on average in 2005, according to the

Kaiser Family Foundation, which also found the percentage of employers offering coverage fell to 60% from 69% in 2000. Many have been passing a bigger portion of costs onto workers, cutting benefits or both.

About 45.5 million Americans, or 15.7%, lack health insurance, according to the U.S. Census Bureau.

But whether those factors add up to health insurance consolidation robbing consumers of promised gains borne of greater combined efficiencies depends on many variables, analysts said.

“It’s a really complicated question,” said Jill Yegian, director of the health-insurance program for the California Healthcare Foundation, a nonpartisan philanthropy organization in Oakland, Calif.

Consolidation is one reason there are fewer players in the market, but there are other explanations as well, Yegian said.

Rural areas, for example, typically have the worst of both worlds, she said. “There aren’t many providers so there are significant problems with access, and because of that the prices tend to be higher as well.”

Often consolidated insurers are facing off with consolidated hospital chains in a pricing tug of war, she said.

“It’s a double-edged sword, with each side saying ‘I better get bigger so I can have more market power,'” Yegian said. “If you look at California, basically you have purchasers saying ‘Let’s think about what the different value is that’s provided for the cost by different kinds of hospitals and let’s try to think about who we want to have in our network.'”

Compared with many other states, California also has a higher proportion of doctors practicing collectively in medical groups, which can enhance their negotiating power, she said.

Taking issue with insurers

Still, health insurers wield more influence through their market position than hospitals when it comes to setting terms, said Jerry Flanagan, health-care policy director for the Foundation for Taxpayers and Consumer Rights, a nonprofit, public-interest advocacy group in Los Angeles.

He said patients end up paying more or going without coverage when there’s less local-market competition and states don’t regulate prices.

“Consolidation means patients have less choice and are beholden to whatever rates that insurer wants to charge,” Flanagan said. “We’re moving toward a single-payer system, which is a single HMO,” he said. “The private market has become a profiteering middleman that’s leeching money out of the health-care system. This issue of the inefficient middleman becomes even more problematic as there’s less competition in the market because the insurance companies have more freedom to take more of our dollar for their profit.”

But Ginsburg maintains that acquisitions such as UnitedHealthcare’s purchase of PacifiCare and Oxford Health Plans have tended to be in markets where the acquirer was not a major player.

He said some mergers are intended to make companies more of a national plan that’s available in more places and with stronger networks, which may attract multi-state employers and could be a plus for consumers.

“Much of the consolidation has come not from mergers but from the larger national plans winning out in the competition over the smaller and local or regional plans,” he said. “That’s what leading the markets to become more consolidated.”

“Many of the mergers we have seen over recent years have not increased the plans’ market share appreciably in particular markets,” Ginsburg added. “For one thing, the [Department of Justice] wouldn’t allow it. The other thing is the share of the leading plans in a market has tended to get larger because they get better payments from providers and can offer lower premiums.”

But lower premiums are far from guaranteed, he said.

“It clearly means lower payment rates for providers, but for consumers you don’t know whether the greater market power or the fact that they’re paying less for providers is going to come out in the balance,” Ginsburg said.

Whether mergers of health insurance companies deliver on the promise of greater administrative efficiencies and economies of scale — translating into better prices and benefits for consumers — isn’t known, Yegian said.

“Almost everything seems to cut both ways,” she said. “It may well be more efficient to process all those claims when you’re enormous. Are there some downsides? Maybe. It’s not crystal clear.”

Consumer Watchdog
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